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The start matters: time-varying investor demand, hedge fund inceptions, and performance

Author

Listed:
  • Lin Sun
  • Zheng Sun
  • Lu Zheng

Abstract

We examine whether time-varying investor demand affects hedge fund companies’ decision to start new funds. We find significantly more fund inceptions in hot markets than in cold markets. Funds opened in hot markets exhibit weaker long-term performance, shorter survival time, and greater fraud risk. Investor clientele also varies with market conditions. Investors in hot markets appear to be less sophisticated, which may provide opportunities for more low-quality funds to enter the industry. Overall, inceptions due to high investor demand are not in the best interest of investors.

Suggested Citation

  • Lin Sun & Zheng Sun & Lu Zheng, 2024. "The start matters: time-varying investor demand, hedge fund inceptions, and performance," Review of Finance, European Finance Association, vol. 28(2), pages 729-768.
    • Handle: RePEc:oup:revfin:v:28:y:2024:i:2:p:729-768.
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    File URL: http://hdl.handle.net/10.1093/rof/rfad031
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    More about this item

    Keywords

    Hedge fund; investor demand; inception; performance; money flow; delegated portfolio management;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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